San Diego home prices in September rose 4.1 percent from a year ago, the biggest year-over-year gain we've seen for any month in the past two years, says a widely watched home price index released Tuesday.

That stat adds further evidence that we may be in the middle of a housing-market recovery, based on numbers from the S&P/Case-Shiller Home Price Index, a national indicator that has a two-month lag because it tracks repeat sales.

The last time San Diego saw such a significant year-over-year jump in home prices was in September 2010, when the gain was 5 percent. On a month-to-month basis, the county closed out this September with a 1.4 percent gain, which marks eight straight months of either flatness or increases.

Homebuying typically slows down by fall. But not this year. Sales in San Diego County rose nearly 13 percent from September to October, as inventory continues to wane and demand, especially among first-time buyers and investors, stays strong.

Potential buyers in certain ZIP codes are fighting for a limited supply of homes, sparked by fewer foreclosures and a high share of underwater homeowners who can't put their homes on the market, said Norm Miller, real estate professor at USD's Burnham-Moores Center for Real Estate.

Roughly 5,300 homes are on the market in San Diego County, half of what we saw just a year ago. Inventory has been dropping for more than a year.

What's largely missing in local inventory are foreclosures that will eventually be resold in the market. The number of homes that have been repossessed by the banks totaled 498 in October, down more than 25 percent from the same time a year ago and down 75 percent from the peak of 2,004 recorded in July 2008.

The tight inventory level has pushed would-be buyers in certain areas to broaden their searches as well as upbid each other, which drives prices up. Record-low mortgage rates, now at 3.31 percent for a 30-year fixed mortgage, also have helped fuel demand for housing.

"The distress keeps declining," Miller said. "We're seeing higher median prices because of that. That's good. We're going to see some modest price appreciation. But there are still a lot of underwater people who are not coming into the market."

Another reason listings are lower than normal is that a significant share of homeowners with mortgages are underwater, meaning they owe more on their homes than their properties are worth. Local estimates of borrowers who are underwater range from 25 percent to 33 percent, but experts generally agree we are in better shape than a year ago.

Miller sees another encouraging sign: slowly growing inventory in the entry-level market of the $200,000 to $299,999 range. He says the available supply here is at four months, which is considered normal to strong and has been slowly increasing from two months ago. Emphasis on slowly.

"Some people are testing the market and are coming back," Miller said. "You will continue to see that in the next few months."